Qualcomm shares fall despite rise in earnings

Wireless chip giant Qualcomm posted strong earnings and revenue for the quarter ended March 31, but its shares slipped in after-hours trading in part because the San Diego company changed the way it reports a key piece of data closely watched by investors.

Qualcomm beat Wall Street’s expectations for earnings with a profit of 59 cents a share, excluding certain items, on revenue of $2.66 billion. Analysts had forecast earnings of 57 cents per share on revenue of $2.63 billion, excluding items.

Revenue was up 9 percent from a year ago. Net income for the quarter was $774 million, compared with a loss of $289 million for the same quarter last year, which was caused by a $748 million legal settlement Qualcomm paid to rival Broadcom.

The better-than-expected results came from increased sales of chips used in cell phones, data cards and other wireless products. The company’s technology is particularly strong in 3G, or third-generation, wireless networks and devices such as smart phones, which can surf the Web and perform a host of complex tasks.

The continued migration worldwide from second-generation networks to 3G networks helped boost Qualcomm’s chip shipments to 93 million, a 35 percent increase from the same quarter a year ago.

“3G subscribers have now surpassed 1 billion worldwide, and with the 3G auction process under way in India, the 3G footprint continues to expand globally,” said Paul Jacobs, Qualcomm’s chief executive.

The company’s highly profitable technology-licensing business also grew during the quarter. But both the chip and licensing businesses were affected somewhat by lower average selling prices of wireless devices compared with a year earlier.

Qualcomm, San Diego’s largest company, said the lower average selling price comes from product mix, with more lower-priced data cards and less-expensive phones now making up a larger piece of the market.

The company released results after the markets closed. While the quarter was a good one, Qualcomm’s shares dipped 8 percent in after-hours trading.

Investors also may have been reacting to lower earnings forecasts from the company for its third quarter. Qualcomm said it now expects earnings of 51 to 55 cents per share and flat revenue of $2.5 billion to $2.7 billion for the quarter because of a seasonal slowdown in device sales after the Christmas holiday.

Qualcomm increased its forecast for full-year earnings, however, to $2.21 to $2.32 per share, excluding certain items, compared with its previous target of $2.10 to $2.30 a share.

For the first time this quarter, the company changed the way it reports information linked to average selling prices, in an effort to provide a clearer picture to investors.

Wall Street tends to zero in on average selling prices because they affect the licensing revenue Qualcomm receives from phone makers that use its Code Division Multiple Access technology.

“There’s confusion out there, given that Qualcomm has changed a key metric,” said Mike Walkley, an analyst with Piper Jaffray in Minneapolis.

“I am surprised the stock is down as much as it is in the after market,” he added. “But for investors who are so used to focusing on average selling prices ... that’s part of the confusion.”

The average price of a phone using Qualcomm’s technology will probably drop to about $185 this year, according to the midpoint of the company’s forecast. Qualcomm lowered the midpoint from $187.

Arnab Chanda, an analyst with Roth Capital Partners, said the change Qualcomm made regarding how it reports the price information is good because it will provide more clarity.

But Wall Street’s growth expectations for Qualcomm may be out of touch with the current marketplace, because growth is coming from regions such as China and India, where cell phones are less expensive, he said.

“The company is big now,” Chanda said. “Handsets are well-penetrated. 3G is well-penetrated. You can’t grow twice (as fast as) the market if you make up a big part of the market. But it’s still a very successful company.”

Mark McKechnie, a Broadpoint Amtech analyst in San Francisco, said the economies of developed countries have yet to recover from the recession.

“The U.S., Europe and Japan are still depressed, and these are the higher average-selling-price regions,” he said. “The hope is that the higher-price markets will come back, but from this report it doesn’t look like they’re seeing signs of that.”